Arbitration Clause Cannot Be Incorporated Without Clear Intention of Parties: Calcutta High Court

Arbitration Clause Cannot Be Incorporated Without Clear Intention of Parties: Calcutta High Court

Stated that the bridge between the two agreements was missing in action

The Calcutta High Court has dismissed applications for interim relief filed by Kobelco Construction Equipment India Private Limited under Sec 9 of the Arbitration and Conciliation (A&C) Act, 1996.

A single-Judge bench of Justice Moushumi Bhattacharya held that the petitioner couldn’t be allowed to incorporate an arbitration clause by reference from the ‘Master’ agreement to the ‘Settlement’ agreement in the absence of unambiguous intention of both parties.

The case involved two arbitration clauses. The bench was asked to hold that the arbitration clause of the first agreement should be treated as being incorporated in the second agreement. There was no special reference indicating a mutual intention on the part of the petitioner, SREI Equipment Finance Limited, and respondent No. 1 to incorporate the arbitration clause from the Master Facility Agreement to the Settlement Agreement.

The Court ruled that the petitioner’s case for interim relief fails in the absence of a definitive contractual relationship between the petitioner and respondent No.1 containing an arbitration clause and the absence of an unambiguous intention to incorporate the clause from one agreement to the other.

The observations were made in an arbitration petition made by the petitioner under Section 9 of the Act, seeking an interim order of injunction upon the respondent, to prevent it from disposing of assets under a ‘Master Facility Agreement’ from 2020 and a ‘Settlement Agreement from 2021.

The petitioner said that the respondent was bound by the master facility agreement executed between the two entities for the financial assistance given by SREI worth Rs.6,72,60,000. It stated that the respondent paid 14 out of 34 instalments under the agreement. The remaining debt was assigned by SREI to the petitioner under a ‘settlement agreement’ in furtherance of its dues of Rs.70,97,70,999 owed to Kobelco.

It relied on certain definitions in the Settlement Agreement to prove that the assignment was done under the Master Facility Agreement. It stated, “SREI could transfer its rights, benefits, and obligations under the agreement to any person without notice to the borrower (respondent No.1) and that SREI had sent an intimation to respondent No.1 about the assignment on 17 July 2021.”

The petitioner further submitted that the respondent had made payments in furtherance of the settlement agreement, after its execution. The payments showed implied consent on the part of the respondent to the assignment of the agreement.

However, the respondent contended that it was not a party to the settlement agreement between the petitioner and SREI and that the petitioner could not incorporate both arbitration clauses contained within the master facility agreement and the settlement agreement.

Thus, in the absence of any privity of contract between the petitioner and the respondent, the arbitration clauses could not be incorporated by a composite reference. The clause would have to be specifically incorporated, which was not done. Thus, reference to it would not be sufficient under Section 7(5) of the Act.

Justice Bhattacharya was faced with two questions: One, whether there existed any arbitration agreement between the petitioner and the respondent. Second, whether a composite reference could be made for two separate arbitration agreements.

She observed, “There is admittedly not 1, but 2 arbitration agreements. One is between SREI and respondent No.1 and the other is a settlement agreement between SREI and the petitioner. The common entity between these is SREI, not a party to the application. Both agreements have independent arbitration clauses. The bridge between these two island agreements is SREI which is ‘missing in action.’ Hence, there is no arbitration agreement between the petitioner and respondent No.1 which can form the basis of a Section 9 application.”

The Judge added, “On whether a composite reference could be made to an arbitration clause to incorporate it from one agreement to another, the statutory provision under the Act did not support such fact-scenario, where ‘the entity, bound by the reference, is not a party to the arbitration agreement.’”

Thus, the bench dismissed the applications while emphasizing the assumption of an underlying arbitration agreement between the parties under the Act. It held that wherever a composite reference was sought, the intention of both parties to incorporate the arbitration clause must be ‘clear’.

It stated, “There is no special reference indicating a mutual intention on the part of the petitioner, SREI, and respondent No.1 to incorporate the arbitration clause from the Master Facility Agreement to the Settlement Agreement. The non-commonality of parties makes the composite reference impossible in law.”